Nikkei likely to surge beyond 30,000 as businesses recover from pandemic

Tokyo share prices are likely to continue rising after the Nikkei index hit the 30,000 threshold Monday, a level not seen since the asset-inflated bubble economy period, as more businesses recover from the coronavirus pandemic fallout.

With major Japanese firms upgrading their earnings outlooks for the year through March, some analysts forecast the 225-issue Nikkei Stock Average will rise as high as 34,000 by the end of this year.

On Monday, the Nikkei ended up 564.08 points, or 1.91%, from Friday at 30,084.15, its highest closing since Aug. 2, 1990, when the Japanese economy was experiencing an asset bubble.

Since the pandemic pushed the Nikkei down to as low as 16,552.83 last March, the benchmark index has nearly doubled, which analysts have attributed to massive monetary easing by central banks and hefty fiscal spending by governments around the world.

“Japanese shares still have room to rise,” said Maki Sawada, a strategist at Nomura Securities’ Investment Content Department, adding that investors are expecting a V-shaped recovery by Japanese businesses in fiscal 2021 starting in April.

Brokers forecast semiconductor and electric component makers will keep leading the rally, as 5G wireless networks become widely available and auto sales recover, especially in China and the United States.

Along with hopes for early passage of a massive U.S. stimulus, the imminent start of COVID-19 vaccinations and Monday’s release by the Cabinet Office of data showing Japan’s gross domestic product posted better-than-expected annualized growth of 12.7% in the October-December quarter drove the Nikkei above 30,000 for the first time in over 30 years.

Market participants, meanwhile, have also started buying companies that had been undervalued amid the pandemic, such as those related to decarbonizing, according to a report by Okasan Securities Co., a Japanese brokerage.

Prime Minister Yoshihide Suga has pledged that Japan will achieve carbon neutrality, or net zero emissions of carbon dioxide, by 2050.

Foreign investors, who have been net buyers of Japanese shares in recent months, are likely to remain buyers in line with a global economic recovery, giving added impetus to the market, analysts said. Foreign investors make up about 70% of trading value in the Tokyo market.

Still, the country’s current potential growth rate is around 0.8%, far below from 3.7% seen in 1990, according to government data.

Global fiscal support reached nearly $14 trillion at the end of 2020, up by about $2.2 trillion since October, according to the International Monetary Fund, with Japan’s spending the second largest following the United States.

With more funds at hand and central banks keeping interest rates near zero, investors searching for bigger returns have turned to riskier assets such as stocks instead of safer but lower returns from investments like government bonds.

“The focal point is how long these reflationary policies will be in place,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management Co.

Given that the labor market is expected to take longer to recover than the economy, such policies are likely to remain for a while, Kichikawa said.

“But the phase of central banks and governments implementing reflationary policies no matter what is nearing an end,” he said.

Market participants are thus closely watching the pace of rises in U.S. long-term interest rates, he said.

Another factor that may trigger an adjustment in the equities market is U.S. President Joe Biden’s policy toward China, according to Shingo Ide, chief equity strategist at NLI Research Institute.

“As more people get vaccinated and infection cases decline in the United States, the Biden administration will likely shift its focus to how to confront China,” a strategic competitor of the United States in the Indo-Pacific and beyond, he said.

Biden has vowed in a foreign policy speech to counter China’s economic abuses and aggressive behavior, while Secretary of State Antony Blinken has pressured China over human rights issues and warned that Beijing will be held accountable for threatening regional stability.

“The market may see a correction in the latter half of the year as economic growth is expected to slow in 2022 while investors will become more conscious of the U.S.-China diplomatic friction,” Ide said.